Prepaid Expense means
Expense of future year incurred in current year
Example
Suppose expense of whole year of 12000 paid together together at one time
In this case,amount of prepaid depends upon type of closing
| TYPE OF CLOSING | AMOUNT OF PREPAID |
| Monthly Closing |
11 month expense is Prepaid (12000*11/12=11000) Remaining 1 month is expense (12000*1/12=1000) |
| Quarterly Closing |
9 month of total amount is Prepaid (12000*9/12=9000) Remaining 3 month is expense (12000*3/12=3000) |
| Annual Closing |
In this case, Prepaid is 0 Whole 12000 is expense of current year |
Entries
When Bill Received
Exp Dr
Prepaid Exp Dr
To Party
Party Dr
To Bank
Entry for write off of Prepaid
Exp Dr
To Prepaid Exp
Assignment
Pass Entries assuming monthly closing
1. The company paid Rent for 3 months in Advance on 1 April @ 20000 pm to DLF India ie Rs 60000
View answer
At the end of month 1:
Prepaid rent and rent for the month made due:
Rent Expense A/c Dr 20000
Prepaid Rent A/c Dr 40000
To DLF India ltd A/c 60000
On the date of payment made:
DLF India ltd A/c Dr 60000
To Bank A/c 60000
At the end of month 2:
Rent Expense A/c Dr 20000
To Prepaid Rent A/c 20000
At the end of month 3
Rent Expense A/c Dr 20000
To Prepaid Rent A/c 20000
2.Resolve Q1 assuming rent was paid on 5 April
View answer
If rent paid on 5 th April
Rent Expense A/c Dr 16667
Prepaid Rent A/c Dr 43333
To DLF India ltd A/c 60000
On the date of payment made:
DLF India ltd A/c Dr 60000
To Bank A/c 60000
At the end of month 2:
Rent Expense A/c Dr 20000
To Prepaid Rent A/c 20000
At the end of month 3:
Rent Expense A/c Dr 20000
To Prepaid Rent A/c 20000
At the end of month 4:
Rent Expense A/c Dr 20000
To Prepaid Rent A/c 3333
To DLF India ltd A/c 16667
3. The Company entered into AMC Contract (Annual Maintenance Contract) for its computers of Rs 30000 for whole year with Venus Computer Services from 10 April 2016 to 9 April 2017
View answer
AMC
For the month of April
Repair and maintenance A/c Dr 1750
Prepaid for repairs and maintenance A/c Dr 28250
To Venus Computer Services A/c 30000
(there are 21 days in April for which service done including 10 April,so we do 30000*1/12*21/30)
Venus Computer Services A/c Dr 30000
To Bank A/c 30000
For the month of May-March (every month)
Repair and maintenance A/c Dr 2500
To Prepaid for repairs and maintenance A/c 2500
(30000*1/12)
For the month of April till 9 April
Repair and maintenance A/c Dr 750
To Prepaid for repairs and maintenance A/c 750
(30000*1/12*9/30)